Low Cost Carriers effect of entry on airfare and passenger traffic within US Airline Industry (original) (raw)
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An empirical model of low-cost carrier entry
Transportation Research Part a Policy and Practice, 2008
Competition between low-cost carriers in rapid expansion and full-service network carriers has definitely become one of the most relevant issues of the airline industry. The present paper addresses this matter by analyzing the entry of the lowcost Gol Airlines, in the Brazilian domestic market, in 2001. A route-choice model is estimated by making use of a flexible post-entry equilibrium profits equation and accounting for endogeneity of the main variables. Results indicate the relevance of market size and rival's route presence as underlying determinants of profitability. Furthermore, it is also performed an analysis of the consistency of Gol's entry patterns with the route-choice behavior classically established by the pre-eminent US low-cost carrier Southwest Airlines -that is, a focus on short-haul and high-density markets. Evidence is found that although Gol initiated operations by reproducing the behavior of Southwest, it quickly diversified its portfolio of routes and, at the margin, became more in accordance with the pattern of entry of JetBlue Airways (another successful US low-cost carrier), focusing mainly on longer-haul markets, albeit with some relevant country-specific idiosyncrasies.
Transportation Research Part E-logistics and Transportation Review, 2009
This paper empirically investigates price reactions to the entry of the low-cost carrier Gol Airlines in the Brazilian domestic market in 2001. Given the substantial reduction in unconditional yields of the incumbent airlines on routes actually entered by Gol, we perform an econometric analysis of the determinants of pricing power along with the analysis of the pattern of price reactions by incumbent legacy carriers. Using data from a panel of routes disaggregated at the airline level, we obtain that (i) both airport and route presence are relevant at explaining pricing behavior; (ii) price responses vary significantly according to flight distance and the amount of seats supplied by the entrant, in the sense that the shorter the route, and the more the seats offered by the newcomer, the stronger the price reactions from the incumbents, with significant point estimates in the range 22-26% in yield reduction for routes as short as 350 km (approx. 195 miles). More generally, the results shed light on the impacts of airline deregulation in emerging markets and the issue of localized competitive advantage due to product differentiation in the industry. firm heterogeneity within a route ('intra-route' investigation), such as and . Both types of studies test the contestability theory and conclude that local market structure matters in the airline industry i.e. concentration-related variables have significant effect on prices. What is more, second-generation studies provided evidence of the significance of market share measures as determinants of within-route competitive advantage, and therefore called attention to the consequences of dominance: ''consumers are willing to pay a premium for the services of the dominant airline [at an airport]" . In fact, those studies usually found relevance for both sorts of measures -market share and concentration -thus reconciling different traditions within the Industrial Organization literature. 1 In contrast to the consensus of the relevance of considering firm-specific disaggregation in pricing analysis, there has been a debate about whether structure affects performance in this industry at either the route or airport level. Evans and Kessides (1993), for example, argue that, due to linear route system replacement by hub-and-spoke strategies, the increasing control of airport facilities by fewer airlines, the advent of frequent-flyer programs and the usage of travel agent commission overrides, ''the bulk of any deviation from competitiveness in the airline industry is (now) associated with airport characteristics rather than with the structure of routes". 2 By making use of route-specific fixed-effects, they found only airport market share effects as statistically significant for the US domestic market, contrary to the results of . The reasoning of the alternative views goes as follows: as one airline develops a hub in a given airport, its products become more attractive, as the number of connections, direct flights, and their frequency tend to increase; in the case of business travelers, other perks such as lounges can also appeal. As a result, incorporating characteristics that consumers are willing to pay for allows airlines to mark up their prices, thus the advocated importance of airport presence as an element of pricing power. Alternatively, the view that route presence is the key variable for pricing power is consistent with a view that higher flight frequencies are sufficient as determinants of pricing power.
Air transport industry has been going through a worldwide transformation in the last decade. Aviation liberalization, started first in US in 1978, followed by EU through 1990s, has also caught on in many developing countries. Flag-carrier airlines previously enjoying monopoly rights in these countries have now faced stiff competition from lean start-up airlines with a simple product. These so called Low Cost Carriers, LCCs, have been instrumental in radically changing air travel in liberalized domestic markets. We build a simple model to analyze the effects of LCC entry to a previously monopolistic domestic air travel market. The airlines compete on both costs and service quality. Even though the model is quite basic, its predictions are consistent with the experience: a substantial fall in airline fares, a dramatic growth in the share of flying public and an increase in LCC market share.
Estimation of a Model of Low Cost Carrier Entry
2004
Competition between low cost carriers in rapid expansion and full-service network carriers has recently become one of the most relevant issues of the airline industry. The present paper addresses this matter by analysing the entry of the low cost Gol Airlines, in the Brazilian domestic market, in 2001. A route-choice model is estimated by making use of a flexible post-entry equilibrium profits equation and accounting for endogeneity of the main variables. Results indicated the relevance of market size and rival’s route presence as underlying determinants of profitability. Furthermore, the consistency of Gol’s decision making with the pattern of entry classically established by Southwest Airlines for the low cost carrier segment – short-haul and high-density markets – is investigated; evidence is found that although Gol initiated operations by reproducing the standards of Southwest, she quickly diversified her portfolio of routes and, at the margin, became more in accordance with Jet...
Low-cost and Full-service carrier’s effect
2010
The fare estimation model proposed in this paper was set up by analyzing the domestic United States air transportation market 2005 year database. A division analyses into seven different studies is presented. There exists substantial fare dispersion in the airline transportation industry for the full-service carrier market whilst very little dispersion can be found for the low-cost carrier market. Both airlines business models were also divided into four different markets. Major fare dispersion has been found for the routes dominated by full-service carriers without the presence of a low-cost carrier and the presence of low-cost carriers make full-service carriers low fares. Routes dominated by low-cost carriers without the presence of full-service carriers price routes with more dispersion than the routes fighting with full-service carriers.
Journal of Transport Geography, 2011
Competition in airline markets may be tough. In this context, network carriers have two alternative strategies to compete with low-cost carriers. First, they may establish a low-cost subsidiary. Second, they may try to reduce costs using the main brand. This paper examines a successful strategy of the first type implemented by Iberia in the Spanish domestic market. Our analysis of data and the estimation of a pricing equation show that Iberia has been able to charge lower prices than rivals with its low-cost subsidiary. The pricing policy of the Spanish network carrier has been particularly aggressive in less dense routes and shorter routes.
Does Price Matter? Price and Non-price Competition in the Airline Industry
2004
This paper studies passengers' choice behavior in air travel. Products are defined as a unique combination of airline and flight itinerary while markets are defined as a directional round-trip air travel between an origin and a destination city. A structural econometric model is used to investigate the relative importance of price (airfare) and non-price product characteristics in explaining passengers' choice of these differentiated products. The results suggest that, on average, prices may not be as important as we think in explaining passengers' choice behavior among alternative products. Non-price characteristics which may include convenience of flight schedules, frequent flyer programs, the quality of in-flight service, among other things, seem to be much more important in explaining passengers' choice behavior. As such, the results have implications for the focus of antitrust policies in the airline industry when assessing the impact of mergers, alliances, or o...
Market Structure and Competition in Airline Markets
SSRN Electronic Journal, 2016
We provide an econometric framework for estimating a game of simultaneous entry and pricing decisions in oligopolistic markets while allowing for correlations between unobserved fixed costs, marginal costs, and demand shocks. Firms' decisions to enter a market are based on whether they will realize positive profits from entry. We use our framework to quantitatively account for this selection problem in the pricing stage. We estimate this model using crosssectional data from the US airline industry. We find that not accounting for endogenous entry leads to overestimation of demand elasticities. This, in turn, leads to biased markups, which has implications for the policy evaluation of market power. Our methodology allows us to study how firms optimally decide entry/exit decision in response to a change in policy. We simulate a merger between American and US Airways and we find: i) the price effects of a merger can be strong in concentrated markets, but post-merger entry mitigates these effects; ii) the merged firm has a strong incentive to enter new markets; iii) the merged firm faces a stronger threat of entry from rival legacy carriers, as opposed to low cost carriers.
Airline Fare Competition in the Post-Merger Era
2020
This paper expands on the research of competition within the airline industry. This analysis estimates the fare-impact of new full-service or low-cost competition in city-pair markets in the domestic United States. Given the comprehensive restructuring of the airline industry as a result of the Delta-Northwest, United-Continental, and American-US Airways mergers, this analysis examines how the fare-impact of competition may have changed since the pre-merger era. This paper suggests evidence of a weaker effect regarding the entry of a low-cost carrier and a stronger effect regarding the entry of a legacy carrier in the post-merger era relative to the pre-merger period. The results support the hypothesis of convergence between the two business models.
This paper develops an empirical model of online airfare determinants to inspect the impact of the entry of a low-cost carrier (LCC). In particular, we investigate whether the increased competition from a recently established LCC induces major carriers to respond in two competitive dimensions: pricing and distribution. We utilize an original database of airfares collected from the website of an online travel agent (OTA) comprising the domestic airport-pairs of the most populous metropolitan area in Brazil. We test whether incumbents reshape their airfare temporal profiles in an attempt to attract the price-sensitive passengers who constitute the target market of the newcomer. We find evidence that incumbents increase their airfare availability on the OTA by 11% and reduce fares by between 15% and 23% for advance purchases made approximately two months prior to departure. Our results suggest that LCC entry partially spoils the existing market segmentation schemes of incumbents, forcing them to revise their distribution management strategy, simplify their fare structure and migrate from a non-monotonic to a weakly monotonic price curve.